The Chancellor’s Autumn Statement is two steps forward, one massive leap back with changes to the VAT flat rate.

The papers have been awash with analysis of the Chancellor’s Autumn Statement, the state of the economy, the impact of Brexit and how the JAMs are going to suffer more for longer.

The Federation of Small Businesses said its impact for SMEs would be “modest and medium term”. For me, there are three things which really stand out that’ll affect my clients and their businesses: two good, one bad – well we can’t have everything can we?!

I’ll start with the bad news…

The changes to the HMRC’s VAT Flat rate scheme to avoid abuse of the system are now complicated and awaiting confirmation but the upshot is that it will be costly news to many businesses like my own – accountants and consultants – service rich but goods poor operations.

The HMRC overview is here but let me clarify.

What is it changing to? A new 16.5% VAT flat rate for businesses with limited costs will replace the current system of sector specific percentages.

How will it work? Up till now, businesses had been able to decide which flat rate % was applicable to their company by trade sector, but now they must decide if they meet the definition of what constitutes a limited cost trader. (This is set to be defined in new legislation).

For some businesses using the scheme, or thinking of joining the scheme, they will need to complete a test to decide whether they should be on the scheme and use the new 16.5% rate.

The new 16.5% category will only apply if costs of goods are either: less than 2% of turnover or if over 2% but less than £1000 per annum. Goods will be specifically defined for the purposes of the measure.

Who will it impact? It will impact service oriented businesses in many sectors whose sector VAT rate is currently significantly lower. It will take time and significant effort to define who is eligible and will result in many businesses paying more tax.

When will it come into effect? April 1st 2017, but it may be backdated to now. Watch this space as more detail, definition and legislation is to come.

On the plus side…

The Chancellor’s financial golden nugget for SMEs was earmarking a not insignificant £400m into venture capital funds through British Business Bank Investments (BBBI) in a bid to unlock £1bn of finance and boost firms’ ability to grow – whether that’s a start up that’s looking for phase 2, a scale-up or to stay ahead.

How it works: The Fund will specifically target later stage ventures through the BBBI VC Catalyst Fund – a stage the BBBI has identified as having a funding gap preventing businesses reaching their full potential.

How to apply for funding support: The BBBI finances through 90+ partners and uses venture capital, equity and debt finance to help fund company expansion as it doesn’t distribute funds directly. This particular £400m pot will be distributed through the VC Catalyst Fund and its partners. To work out which is the best VC for your business to apply to – start with the Business Finance Guide.

Finally, it’s great to see the Chancellor confirm his plans to permanently increase the business rate relief, taking 600,000 small firms out of the rates system completely and lowering bills significantly for many others. Rural businesses will now get 100% relief on rates – which is fantastic news.

So for many small businesses it really is a case of two steps forward, one back…

WrightCFO is an outsourced Finance Director consultancy specialising in part-time FD contracts in the SME market. Contact me for a free consultation.

www.wrightcfo.co.uk

sophie@wrightcfo.co.uk

Tel. 0208 943 9027

 

 

HMRC under fire…and we need to keep the heat on high

It’s fair to say HMRC have had a pretty bad start to the year. Google-gate coincided with the end of the tax year underlining their eye-wateringly low effective tax rate of 3%, while millions of normal taxpayers looked on in disbelief with nothing short of envy, frustration and anger.

The unfairness of it all is made worse by the Chancellor’s proposals to ‘simplify’ tax by making businesses file mini-returns quarterly.

What’s the issue?

So for anyone who’s missed what this is all about – it’s part of the HMRC’s strategy to Make Tax Digital – a revamping and overhaul of the current antiquated system, that’s supposed to take tax reporting and collection into the 21st century. The controversial proposal to make returns quarterly hit the news again this year after it was first mooted at the in the 2015 Spending Review and was discussed in parliament on 25 January after a petition against them got over 107,000 signatures.

Whilst the general idea of updating our antiquated tax system and Making Tax Digital seems sensible and I can see the benefits of encouraging those businesses who are not yet online to go digital, we need to be careful that the changes benefit not just the HMRC but business too.

The furore over the quarterly tax return, as it was dubbed, is a prime example. In a world where we already have excessive red tape, deadlines and requirements for business management processes, to make deadlines quarterly, rather than annually, can only make more work not less.

What they say?

HMRC argued that it was not proposing a quarterly tax return, that the updates would: “reduce the burden and cost to business of keeping their tax affairs up-to-date and make it easier to spot mistakes. Quarterly updates will largely be a matter of checking data generated from record keeping software or apps and clicking ‘send.”

Hmm, I’m not so sure

But I – and over 100,000 others – simply don’t buy this HMRC line that it will be a quick press of a button to essentially download information that already exists. Figures will have to be prepared, mini audits conducted and man hours spent collating this information and reporting it in the required format.

Filing even mini returns or HMRC-worthy financial updates four times a year may be useful for the HMRC and help streamline their operation but it will be more work for small businesses, and especially for those who outsource all their accounting, it will also undoubtedly be more expensive.

At least the HMRC plan on introducing these reforms gradually after lengthy discussions and consultations – and this makes scrutiny even more relevant and important.

The quarterly tax return uproar and the row over Google & pals’ arrangements are vital to hold the government and HMRC to account. We need to make sure that the reforms which arise work for everyone not just ease the Revenue’s workload management or help big business pay less tax.

SMEs need to keep the heat on and make our voices heard.

 

https://petition.parliament.uk/petitions/115895

 

http://www.wrightcfo.co.uk

sophie@wrightcfo.co.uk